Ethanol industry executives must be feeling a bit like punching bags these days. They’ve been accused of inflating food prices, oil prices and carbon emissions — instead of reducing them. An increasing body of research is showing ethanol made from food crops such as corn and wheat is not quite the eco-friendly technology it was thought to be. But the industry believes it has a saviour in second-generation or cellulosic biofuels, made from agricultural waste (the leaves and stalks of corn, for example) or non-food crops such as switchgrass. Both government and industry in North America are investing heavily. The federal Conservatives have allocated $500 million to foster cellulosic technology, and the U.S. Department of Energy is investing up to US$385 million over the next four years to build six cellulosic ethanol production plants.

Certainly, the technology has the potential to reduce dependency on fossil fuels and to lower greenhouse-gas emissions. But no cellulosic ethanol is produced on a commercial scale today. In fact, it makes up just 0.2% of ethanol production in Canada, despite decades of research. The big problem is cost. It is technically challenging and expensive to produce fuel this way.

The joke in the industry is that cellulosic ethanol has been just a few years away from economic viability for decades. David Layzell, executive director of the Institute for Sustainable Energy, Environment and Economy at the University of Calgary, has consulted with various biofuels companies for more than 10 years. Though he remains hopeful a breakthrough will be made, he is nonetheless surprised that cellulosic ethanol is still not viable. “I’ve had discussions with some companies for years, and it’s always been, ‘Well, we’re really close,’” he says. “I would expect them to be further along now, given the subsidies and the support they’ve been given.”

Back in 1991, a paper appeared in the journal Science predicting cellulosic ethanol would be competitive with the price of gasoline by 2000. Such optimism is now passé. The Food and Agriculture Organization of the United Nations, along with the Organisation for Economic Co-operation and Development, released a 10-year outlook on agriculture in July and summarily dismissed cellulosic fuel, stating it is not expected to be produced on a commercial basis in the next decade. Even some in the industry acknowledge the scope of the challenges. “There hasn’t really been a major breakthrough in production of ethanol from biomass,” says Frank Dottori, the founder of forestry company Tembec, who came out of retirement earlier this year to head the cellulosic division at GreenField Ethanol, a Toronto-based producer. “It requires a very significant technology jump.” In the next breath, though, Dottori adds that GreenField is close to a breakthrough: “We hope next year at this time, we can say, ‘We got ’er done.’”

He’s not the only one pushing an aggressive timeline. Ottawa-based Iogen is working toward a commercial-scale facility in Saskatchewan and wants it completed within two years from the time the project is approved and funding is secured. British Columbia–based Lignol Energy Corp., another cellulosic player, plans for a facility in Colorado to be completed by 2012. U.S. President George W. Bush wants to make cellulosic ethanol cost-competitive by 2012 — a wildly optimistic goal. “Corn ethanol isn’t even cost-competitive with gasoline yet,” points out Ross MacLachlan, CEO of Lignol.

Some are wondering if the rush to cellulosic ethanol is misguided. There may be easier and less expensive ways to reduce emissions that do not receive as much government attention. With so much money invested in cellulosic ethanol, the next few years will prove if it can become anything more than a grandiose science project — and whether those millions of dollars of public money have been worth it.

Cellulose is the main component of a plant’s cell walls, making it the most abundant organic compound on earth. But the reason why turning it into fuel is so difficult can be reduced to one simple fact: plants are tough. They have evolved for billions of years to avoid destruction. First-generation biofuels are made from the simple sugar molecules in corn and wheat, but cellulose is held together by a strong, glue-like substance called lignin, and its bond on the cellulose must somehow be loosened before the plant can eventually be converted into fuel. No one has figured out a cost-effective way to do that.

Several technologies are being explored. Some companies have tried a chemical pre-treatment process to get at the cellulose, using enzymes to convert it to sugars, which are then fermented into alcohol. Enzymes are expensive, however, and the lignin still left in the plant can seriously inhibit the fermentation process. Gasification is another option, but it is energy-intensive: biomass is heated to around 1,000°C and converted into a synthetic gas — a mixture of carbon monoxide and hydrogen — which is then turned into ethanol or other fuels. A few companies in the U.S. are experimenting with bacteria that can decompose cellulose naturally, eliminating the costly pre-treatment and enzyme steps. SunEthanol, for example, is attempting to make ethanol using a microbe the company founders discovered in the soil of western Massachusetts, where the firm is based. Synthetic Genomics, a California-based company headed by Craig Venter, is essentially aiming to genetically engineer new organisms that can do the job more efficiently than naturally occurring microbes can.

Research in Canada isn’t quite that far out. Iogen is the country’s most prominent name in cellulosic ethanol. The privately held company, founded in 1974, transferred its knowledge of producing enzymes for the pulp-and-paper industry and launched a cellulosic ethanol program, producing its first batch in 2004. Now it’s waiting for Sustainable Development Technology Canada (SDTC) to make a final decision about funding for the commercial plant in Saskatchewan, which will produce approximately 90 million litres a year. The estimated cost is $550 million.

The federal government has long been a supporter of Iogen — the company had received more than $20 million in funding as of 2004 — and it has also proven adept at attracting private investment. Royal Dutch Shell increased its stake in Iogen’s energy division to 50% in July. Iogen has been operating a demonstration facility in Ottawa since 2004, producing two million litres a year, mostly from wheat straw. The company will not, however, discuss the cost to produce a litre of cellulosic ethanol at its demonstration facility, nor will it talk about the economics of its proposed commercial plant.

Perhaps Iogen just wants to avoid embarrassment. After all, a Globe and Mail article from 1997 reported Iogen could produce the fuel at a cost of 30¢ to 35¢ a litre. The cost to produce gasoline at the time was 25¢ a litre, and the company expected to be competitive “within a few years.” All the company will say now about the economics of cellulosic ethanol is that it “compares favourably” to conventional ethanol.

Some in the industry have expressed skepticism about such claims — although it may be little more than competitive jeering. “My mother always said be positive about things or don’t say anything,” Dottori at GreenField says of Iogen. “All I would request is that you look at the historical announcements over the last six years and check for consistency and performance.”

But Dottori is doing a lot of boasting of his own. GreenField, which began as Commercial Alcohols in 1989, is already Canada’s largest ethanol producer, and now wants to build a commercial cellulosic ethanol facility within three years. To start, GreenField is working with Enerkem, a small Quebec-based firm specializing in gasification, to build a plant in Edmonton that will produce 36 million litres a year from approximately 100,000 tonnes of municipal waste — mainly paper, wood and plastics. The City of Edmonton and government of Alberta are pitching in $20 million for the $70-million plant. “There’s a tremendous potential if this technology works,” Dottori says, though he acknowledges the challenges of cost and energy efficiency still remain. Like Iogen, GreenField is also researching enzymes to break down agricultural waste, such as the corn husks left over from traditional ethanol production. A breakthrough there would do more than complement GreenField’s existing corn ethanol business. “You’ve got ethanol plants using corn. The waste is centralized right now. Why not use this residue?” Dottori asks.

Adding to the urgency for conventional ethanol producers to move to second-generation is the fact that making fuel from corn is no longer as economical as it once was. Many producers are grappling with razor-thin profit margins as a result of high corn prices, and cellulosic ethanol could add to their bottom lines. Producers already rely on the sale of dried distiller’s grain, a byproduct used as animal feed, to keep afloat financially. “Without the revenue from distiller’s dried grains, corn ethanol plants do not make any money,” says MacLachlan at Lignol. But the economics for second-generation biofuels are even worse. “The enzyme costs are still too high, and the processing costs are still too high to make cellulosic ethanol on its own economically viable,” he says.

MacLachlan has perhaps one of the industry’s more realistic views of cellulosic ethanol, recognizing the cost challenges are insurmountable for the time being. Lignol is investigating other products that can be made from biomass in order to still make cellulosic ethanol, but also earn a profit. The company plans to produce furfural, a chemical used in the production of a variety of products including lubricating oils and brake linings, and high-purity lignin. MacLachlan claims there are a host of products, such as industrial resins, that are now derived from oil that can instead be derived from lignin. “We have more interest in our company from chemical companies than we do from energy companies, simply because there’s so much of an interest to see new products with a green theme,” he says. There are other applications Lignol is looking at for the future, such as acetic acid and xylose, a food sweetener.

Lignol’s method differs in that the company removes all of the lignin from the plant matter early in the process, rather than merely weakening its hold on the cellulose. That way, there is no lignin left to interfere with fermentation later on. A $15-million pilot facility in Burnaby, B.C., will be completed this September. Both the provinces of Alberta and British Columbia, along with the SDTC, chipped in to finance it. Lignol is also starting work on an $88-million plant in Colorado in partnership with Suncor, $30 million of which is coming from the U.S. Department of Energy. Lignol received the funding on the condition the plant is completed by 2012, but MacLachlan says it will likely be operational by 2010.

Lignol will use residuals from the forest products industry and trees killed by the mountain pine beetle as feedstock, since MacLachlan doesn’t believe in growing new plants for ethanol production. “It takes five years for a crop to fully germinate. When you’re sitting there with these opportunities right in front of you, why would you want to do something crazy like that?” he says. Roger Samson, executive director of Resource Efficient Agricultural Production (REAP) Canada, a non-profit research organization in Montreal, sees a problem with relying on beetle-killed wood in the long term. “That resource will be a big blip, and it’s gone,” he says.

Feedstock is a challenge for all producers. Prices can rise as with corn, destroying profitability, and maximizing the amount of ethanol made from each tonne of biomass is crucial. That’s where Performance Plants hopes to come in. The privately held Kingston, Ont.–based company is engineering new breeds of plants specifically for biofuels. “What we’ve done for hundreds of years is we’ve selectively picked out crops that produce huge amounts of seed, of food — we’ve minimized the biomass, which is considered agricultural waste,” says president Peter Matthewman. Performance Plants is doing just the opposite: minimizing seeds and boosting the size of stems and leaves, where cellulose is found most abundantly. Matthewman believes it’s possible to double a plant’s biomass toggling the gene responsible for cell growth within the leaves and stems.

The company’s work has yet to move out of the lab, however. Matthewman expects to be conducting field trials with enhanced biomass crops by the end of next year, a process that usually takes about three years. The company is also working on developing plants that contain less lignin, the troublesome substance that prevents cellulose from being broken down, further driving down production costs. Such work is only in the early stages, and commercialization could be as far as eight years away — assuming there are no major setbacks.

Performance Plants plans to sell its proprietary seeds to farmers, as well as grow its own crops to sell to ethanol producers. Customers will have to pay a premium for these seeds, of course, and it’s not yet clear how affordable the business will be for all parties involved. “Our initial analysis says we can do it,” Matthewman says, “but ultimately the final model will depend on what comes out of the field trials.”

Performance Plants has one other biofuels project underway, and it focuses on using biomass to replace not gasoline, but coal. The company is developing crops to be compressed into fuel pellets and then used for heat and power generation. The ideal crop contains high amounts of lignin, allowing it to burn more efficiently. Solid biofuels such as these don’t get a lot of attention in Canada. There are virtually no government programs to support the technology, and that’s frustrating for Roger Samson at REAP-Canada. “We worked with the cellulosic ethanol industry off and on for about 15 years, and we have lost confidence in cellulosic ethanol to be a viable technology in North America,” he says. Samson says the technology is both thermodynamically inefficient and expensive, and argues that solid biofuels to replace fossil fuels offer greater reductions in greenhouse-gas emissions at a lower cost.

Layzell, at the University of Calgary, commissioned Samson to report on biofuel options for Ontario earlier this year. The study found that compressing switchgrass into pellets and burning them for heat and power generation resulted in nearly three times the greenhouse-gas reductions of using switchgrass for liquid biofuels. Samson calculated that a typical cellulosic ethanol facility would require a capital investment of $175 for every gigajoule of energy production capacity; a pellet-powered electricity plant requires only $5 to $6 per gigajoule. “The least efficient thing is to take biomass and turn it into liquid fuels,” he says. “Cellulosic ethanol is just so far from its targets. It’s behind schedule, and it’s just not comparable with other renewable energy technologies.” Douglas Auld, an economics professor at the University of Guelph, made a similar conclusion in a July paper for the C. D. Howe institute, writing that subsidies for biofuel production are more cost-effective when used on methods to replace coal instead of gasoline.

Despite these benefits, support has been minimal so far — even though more than 800,000 tonnes of pellets are exported from Canada every year for heat and power generation. Only 10% is used domestically. Some progress is being made, however. Biomass electricity projects can receive an incentive of 1¢ per kilowatt-hour from the federal government, and B.C. Hydro announced a request for proposals for such projects earlier this year. Ontario Power Generation launched a solid biofuels project two years ago, co-firing biomass at some of the province’s coal plants, although such work is still in the experimental phase.

Government subsidies are still necessary for solid biofuels, since pellets are less energy-efficient than coal. A subsidy of $4 per gigajoule is enough to make solid biofuels competitive with coal in Ontario, Layzell says. The Ontario government is already spending $8 per gigajoule for corn ethanol — and getting minimal greenhouse-gas reductions in return.

Given that using biomass for coal replacement is cheaper than using it for liquid transportation fuels, and the technology is further along, Layzell recommends Canada develop a large-scale biomass program targeting power generators and the energy-intensive cement and steel industries. Transitioning to liquid biofuels, if second-generation biofuels prove to be economical, will then be easier, since the infrastructure for growing and transporting biomass will be in place. Instead, Canada appears to have it backward, rushing toward an unproven and expensive technology while ignoring what is perhaps a more promising opportunity. “The policy got ahead of the science, and the idea of why we’re doing biofuels in the first place was not clearly thought through,” Layzell says, citing as contributing factors the lobbying efforts of the ethanol and farm industries and Canada’s willingness to follow U.S. policy.

The government’s focus on liquid biofuels is disconcerting for Samson at REAP, as well. “Renewable energy development, especially bioenergy, is in its infancy,” he says, “and it’s very early for the government to be picking winners.”

But the truth is, both forms of biofuel still face a massive challenge in securing adequate feedstock, and that will be a major limiting factor in terms of how much fossil fuel use they can displace. Technology can boost crop yields, marginal lands can be used to grow new crops, and there is plenty of agricultural waste to be used. But to meet 20% of primary energy needs with biofuels by 2030 requires nearly doubling the entire agricultural and forestry output of Canada. Layzell calculates another 130 million tonnes of biomass are needed, on top of the 165 million already produced each year. That raises the question of just who will do all of that growing. The average age of farm operators is increasing (it’s about 52, according to Statistics Canada), and young people aren’t exactly flocking to the profession. Dottori at GreenField is blunt about the limitations of cellulosic ethanol. “It’s not going to solve the fossil fuel issue,” he says. At most, he sees it eventually displacing between 10% and 12% of the country’s gasoline use. “I think that’s as far as you can get so it’s still economically viable.”

Cellulosic ethanol doesn’t necessarily mean the end of first-generation technologies, either. Promoters of first-gen biofuels often say they are merely a stepping-stone to better, more sustainable technologies. After all, corn ethanol has been made out to be a villain, contributing to food inflation with minimal or no environmental benefit — partly with public money. Between 2007 and 2012, federal and provincial spending on ethanol production (excluding second-generation) will approach $1.9 billion. Having spent billions themselves to set up an industry around making fuel from corn and wheat, ethanol producers certainly have a reason to maintain the status quo.

GreenField, for its part, has three corn ethanol production facilities and aims to pump out 700 million litres a year by 2009. Dottori does not see cellulosic ethanol as a disrupter: “If it takes off — and I think it will — it’s not going to have any significant effect on the current production of ethanol because it’s cheaper to produce ethanol from corn.” First-generation technology is essentially a two-step process; second generation involves at least three steps. “The third step will add cost regardless,” Dottori says, “unless some miracle happens.”

So what is switchgrass, anyway?

It's cheap, it's fast and it likes to grow almost anywhere.

Switchgrass is commonly touted as an ideal feedstock for second-generation biofuels in North America. The perennial grass was plucked from obscurity when President George W. Bush cited it as a source of cellulosic ethanol in his 2006 State of the Union Address. The wispy plant, which can sprout nine feet tall, grows naturally across the Prairies, Ontario, Quebec and big pieces of the United States, and has a number of advantages as a feedstock. It grows quickly, and will do so in just about any agricultural region across North America. Minimal fertilization is required, which helps to keep input costs down, and it is one of the best plants for sequestering carbon. The plant’s proponents also champion the fact that switchgrass can flourish even when grown in poor soil, meaning it can be developed on land otherwise unsuitable for farming so as not to compete with food production. Not bad for a plant whose primary function used to be cattle feed.